Economic woes in Europe's PIGS (an acronym for Portugal, Ireland, Greece, and Spain, states at the periphery of the EU) have been grabbing headlines recently. Greece's swan dive has gotten the most attention so far, but there's likely another economy in line for the springboard: Spain.
It's only just now started to show up on everyone's radar, too. When all attention was on housing prices, Spain looked relatively stable: Over the last year, average housing prices dropped a mere 9%. As HSBC bank put it (italics added), "The [price fall] is much smaller than the 20% peak-to-trough drop seen for the UK housing market or the 32% fall of US housing prices, and is difficult to explain given the dominance of the housing market in the Spanish economy."
Not so difficult. Spanish banks are holding all the properties. It's a repeat of a strategy from the early 1990's, when local banks held onto their property portfolios until economic recovery caught up and let them unload the properties at acceptable prices. Makes perfect sense -- if it worked before, why not try it again?
The only problem is Spain's "resilient" property market is likely ready to evaporate. The Bank of Spain has doubled the amount local banks must set aside to cushion repossessed property losses, and with liquidity already hard to come by, the banks have no option but to sell their properties. June estimates by Spanish bank BBVA said that housing prices would drop by 10% in 2009 and 12% in 2010, with a total 30% peak-to-trough drop. A December review hasn't changed those numbers.
We've all seen the devastating impact of a 30% drop in housing prices in the U.S. Imagine what it might do to a country that already has the Eurozone's second-worst unemployment rate (nearly 20%, second only to Latvia), whose credit outlook has been downgraded to negative, and whose budget shortfall for 2009 is five times last year's levels.
Keep also in mind that Spain is the Eurozone's fifth-largest economy, which, because of its buoyant property sector, has been a vital intra-Eurozone source of demand for export-reliant markets like Germany.
If Spain's domestic financial system becomes more unstable, the shockwaves will be felt throughout asset and interbank markets. Keeping your European investments safe in a world economy
this turbulent requires constant updates on market moves all over the Eurozone. The editor of Elliott Wave International's Monday-Wednesday-Friday
European Short-Term Update Chris Carolan covers Spain every Wednesday.
Get up to date now, risk-free.